Captive Insight Vol I | Page 14

CAPTIVEINSIGHT

A Driver for
Competition
by Gonzalo Jalles
Chairman, Cayman Finance

Competition is good because it
promotes efficiency, innovation, and
drives costs and prices down. The
problem is that unless we embrace
globalisation certain sectors of
Governments around the world
chose not to compete. In this context
international financial centres (IFCs)
like Cayman not only promote
competition but limit excessive
Government expansion and don’t take
my word on this:
“ the ability to choose the location of
…
economic activity offsets shortcomings
in Government budgeting processes,
limiting a tendency to spend and tax
excessively…” [1]
and
“vidence also suggests that tax
E
autonomy may lead to a smaller
and more efficient public sector,
helping to limit the tax burden
and improve tax compliance…
Efficiency-raising effects of tax
autonomy and tax competition on
the public sector have also been
reported in empirical research with
Norwegian and German data… Tax
autonomy generates opportunities
to choose the level of public service
provision and taxation, although
in practice such “voting with
your feet” seems mostly limited to
young, highly educated and high-

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income households. Decentralised
tax setting also fosters benchmarking
of the performance of jurisdictions
belonging to the same Government
level by voters, even in the absence
of “voting with your feet”… [2]
One of the reasons IFCs continue to
be successful is that many countries
have developed overcomplicated tax
systems. They also tax economic
activity repeatedly throughout the
production and commercialisation cycle
with treaties and rebates that attempt
to avoid double and triple taxation but
fail miserably to do it in a viable way to
promote international capital flows.
On the other hand, many IFCs have
built their tax collection systems in
a very simplified way that avoids
these pitfalls and is centred around
consumption, which is especially true
in the case of the Cayman Islands;
and while many countries complain
and believe this is not a good idea, the
Organisation of Economic Co-operation
and Development (OECD) again said -“hifting the taxation of income to
S
the taxation of consumption may
be beneficial for boosting economic
activity (Johansson et al., 2008 provide
evidence across OECD economies).
These benefits may be bigger if personal
income taxes are lowered rather
than social security contributions,
because personal income tax also
discourages entrepreneurial activity
and investment more broadly.” [3]
This demonstrates what a simplified
tax system based on simple economic
theory could look like if legislators
and regulators did not have a pervasive
incentive to act in the opposite way.

image © radoma - Fotolia.com

Competition and capitalism
have been proven as the best
of all economic models tried
so far, so unless the reader
is interested in relocating to
Cuba, rural China, or certain
other parts of the world, we
will assume competition is a
good thing.